How Could Fiduciary Duties Be Affected By New LLC Act?

Note: All articles on Utah’s New LLC Act are in the process of being updated to conform to the changes made before it was enacted in 2014. Please check back to see the revised articles.

1. The Existing LLC Act prohibits fiduciary duties from being reduced by the operating agreement or other documents. The New LLC Act allows fiduciary duties to be altered or eliminated “if not unconscionable or against public policy.”

2. When the New LLC Act becomes effective as to a given LLC, that LLC could revise its operating agreement to eliminate the duty of loyalty or could spell out specific actions that would not violate that duty.

3. If the duty of loyalty is lessened or eliminated, those in control of the LLC could engage in self-dealing transactions with relative impunity.

4. If those in control of the LLC are the persons who prepare the operating agreement for the LLC (or cause it to be prepared), they could ‘slip one by’ the other members who are either unrepresented or unsophisticated in LLC matters. Then, in the future, those controlling persons could engage in self-dealing transactions and the other members might be left without a remedy since they would have signed an operating agreement that specifically (or generally) authorized those transactions. Thus, how could a person complain of a transaction approved in a document he/she signed?

5. For their ‘deals’ in which the other members or investors are unrepresented or unsophisticated, unethical promoters may want to form their LLCs under the New LLC Act to take advantage of reduced fiduciary duties.

6. Where fiduciary duties have been waived, eliminated or reduced substantially via written provisions in the LLC’s operating agreement (that is signed by all members), it might be difficult for a member to obtain any remedy for redress, such as judicial dissolution of the LLC, since the member would have to prove that the conduct of those who control the LLC was “illegal, oppressive or fraudulent”. How could such alleged action be that when the member had already agreed in writing to waive, delete or reduce that duty? And, to make things worse, since operating agreements can be oral or implied under the New LLC Act, those in control of the LLC could allege that all members had waived the affected fiduciary duties by an oral or implied agreement.

7. The duty of disclosure to other members may also be reduced if the operating agreement expressly waives or eliminates certain fiduciary duties and all members sign the operating agreement. [Why the need to disclose something that has been waived?]

8. Under the New LLC Act, instead of just 2 specific duties — care and loyalty — there are, perhaps, more than 2. The open-ended approach creates uncertainty for LLCs, members and managers.